With the arrival of vaccines, hopes have risen that the Covid-19 crisis will end soon. The shock delivered by the pandemic, in a sense, is a “dress rehearsal” for addressing another issue of paramount importance — climate change. The similarities between the two challenges are stark. As Mike Hayes, Global Head of Climate Change, Decarbonisation and Renewables, KPMG International, points out, both Covid and climate change represent dimensions of a health crisis.
The global crisis around Covid has put the spotlight on the much bigger issue of climate change, making decarbonisation central to it, continues Hayes, a renewable energy sector veteran of over two decades. Unless speedy action is taken, it could undermine the global financial system and stress not just governments but also the corporate sector.
Before the pandemic, corporations were only starting to embrace decarbonisation. But after Covid derailed businesses for nine months, decarbonisation is now top of the boardroom agenda. Though climate change may seem distant — something that will happen , say, 20 or 30 years later — its impact will hit sooner than later and have a grave financial fallout. The corporate world is starting to realise that a climate crisis will bring with it existential, financial, and business risks.
Though climate change may not dominate headlines in mainstream media, it is going to be a big issue in the corporate world and in government.
Mark Carney, a former Governor of the Bank of England, and the UN Special Commission on Climate Change, have been emphasising this issue for a number of years. What, then, does climate risk entail?
The first is physical risk, which affects businesses exposed to warmer weather, floods, heat waves, drought, and colder winters. The intensity of harm depends on the nature of the business. The second fallout is transition and organisational risks. Governments will tighten regulations around carbon and carbon management. It has already started to happen in the European Union, with corporates having to re-orient to the changed ground reality.
Customer sentiment towards products and services is rapidly changing. Earlier, the accent was solely on quality and price. Now, carbon content has also become a factor. There is a discernible shift towards low carbon purchases, whether it’s a large corporate consumer or an individual.
Other pressures operate on a company and its supply chains, because of emissions. Corporates have begun to insist that suppliers must be low on carbon emission.
For businesses, it is not just a disclosure issue any more. Big companies in sectors such as pharmaceuticals, financial services and technology realise they are exposed to climate risk. Then there are the hard to abate power and automotive sectors. While tech companies are well on their goal to decarbonisation, at the other end of the spectrum, heavy industry is very much at the beginning of the process.
If corporates do not respond to this challenge, investors will start to move capital elsewhere.
The European Union, China, Japan, and South Korea have committed to net-zero emission. In the US, the Biden administration is also aligned to this commitment. The appointment of John Kerry, as the Climate Envoy, is indicative of this.
KPMG, among others, is trying to develop technology tools to measure climate risk in financial terms. It is likely to be obligatory next year for companies to report climate risks in their financial statements detailing the action taken to mitigate them.
Today, because cost of renewable energy has fallen dramatically, corporates are able to access cheaper green power.
Green finance
There is also a whole new world of finance available to companies that plan to decarbonise. These are largely through green finance and green bonds. Big US companies are already raising funds through this route. According to KPMG’s Hayes, “The volume of green investors around the world has increased exponentially. They are looking for green investment opportunities and green bonds as a product. This is becoming a mainstream corporate product.”
In the US, employees are now keen to know whether the companies they work for are eco-friendly or not. Post-Covid, such environmental awareness will only grow.
The electric car revolution is already happening. Diesel and petrol cars are being banned in some countries; the UK has said it will ban them from 2030. In India, too, electric mobility policies have been put in place with 100 per cent EV target by 2030.
There is also talk about green hydrogen as an alternative fuel. It is expected to go commercial in 10 years.
There are several innovations which currently lack funding. Hopefully, the wake-up call from the pandemic will encourage investors to provide financial support to projects that show promise. While Covid has exposed the chinks in our healthcare system, it has also driven home the truth that a healthy world has to necessarily be a carbon-free world.